529 Plan FAQs: About 529 Plan Accounts
What is a 529 plan?
529 plans are flexible, tax-advantaged accounts designed specifically for education savings. They are offered by individual states, but you do not have to be a resident of a particular state to invest in that state's plan. Withdrawals used for qualified education expenses are free from federal income taxes and, in many cases, state taxes.
How do I choose a 529 plan?
First, there are some features that are common to all state-sponsored 529 plans, including:
- Any earnings grow federal income tax-deferred
- When you withdraw money for qualified education expenses, those withdrawals are federal income tax-free
- You choose how the funds are used; 529 plan distributions can be used for tuition, books, room and board, and any other qualified higher education expense at most accredited colleges and universities in the U.S. and eligible foreign schools. Additionally, $10,000 per year can be applied toward tuition expenses for elementary, middle, and high schools (private, public, or religious). Although the money may come from multiple 529 accounts, it will be aggregated on a per beneficiary basis, and any distribution amount in excess of $10,000 will be subject to income and a 10% federal penalty tax.
When choosing a 529 plan, Fidelity suggests that families consider the following:
- In-state tax benefits – such as state tax deductions
- Investment options – most 529 plans offer a number of investment options, including Age-Based Portfolios, which invest savings based on a beneficiary's age and the number of years until he or she will be starting college; some plan managers offer portfolios that consist solely of funds they manage themselves, while others offer access to portfolios managed by multiple fund companies
- Fees and expenses – including account management fees and management fees on underlying portfolios
- Plan performance – when available, review 1-, 3-, 5-, and 10-year performance figures
- Investment management – what financial services company is managing the plan and what types of services does the company offer?
If my state offers a tax deduction, should I just invest in my own state's plan?
Investors should first determine whether their own state's plan offers significant tax benefits, such as a state income tax deduction. If it does, they should consider investing in that plan. However, it's possible that a state plan may offer tax incentives, but have a record of poor performance or charge high fees that could offset the tax benefits. Fidelity suggests that investors consider a range of additional factors, including a plan's investment manager, investment options, plan performance, and underlying fees and expenses when choosing a plan.
I have a Uniform Gifts to Minors account or Uniform Transfers to Minors (UGMA/UTMA) account. Can I transfer those assets into a 529 plan account?
Yes, however, you must first liquidate the assets in the UGMA/UTMA account and pay any applicable taxes. Investments may be subject to fees and expenses. After liquidation, you can invest the cash in an UGMA/UTMA (Custodial) 529 plan account. An UGMA/UTMA 529 plan account will be subject to the rules for both types of accounts, including applicable UGMA/UTMA state statutes. You cannot change the beneficiary of an UGMA/UTMA 529 plan account. You may want to consult a tax professional regarding your specific tax situation.
If I have more than one child, should I have more than one account?
You will likely want separate 529 plan accounts for each child. Each 529 plan account can have only one beneficiary. Many investors who are saving for college choose to take advantage of the Age-Based Portfolio Strategy for their accounts, which manages the account based on the age of the child. For this reason, you may want separate accounts for children of different ages.
What are the fees and expenses?
- There is no annual account fee associated with any of the Fidelity-managed 529 plan accounts
- There is a program management fee that covers the cost of trust administration services, such as recordkeeping, statements, and customer service
- In addition, each of the underlying mutual funds in which a portfolio's assets are invested also charges investment management fees and other expenses; the plans do not invest in any mutual fund with a sales load — underlying mutual fund fees vary by portfolio
- Please see the Massachusetts U.Fund College Investing Plan Fact Kit and Application for more details on fees and expenses
I have an account in another state's 529 plan. Can I transfer my account to one of the Fidelity-managed 529 plans?
Yes, you can. This type of transfer is called a rollover. Under federal tax laws you are allowed to roll over a 529 plan account for each beneficiary once during any 12-month period. To roll over an account, download the Fidelity College Investing Plan Rollover Form (PDF) or call us at 800-544-1914.
What happens if my child doesn't attend college or I otherwise have money left in the account?
529 plans offer significant flexibility should the designated beneficiary (student) decide not to attend college, or if the funds are not used for other qualified educational expenses. You can take out the money as a non-qualified withdrawal, but any earnings on non-qualified distributions are subject to federal income taxes at the recipient's rate as well as a 10% federal penalty. You can also change the beneficiary on your 529 plan account to eligible family members of the original beneficiary without incurring federal income taxes and the 10% federal penalty. A family member is a person who has one of the following relationships with the original beneficiary: (1) son or daughter; (2) stepson or stepdaughter; (3) brother, sister, stepbrother, or stepsister; (4) father, mother, or an ancestor of either; (5) stepfather or stepmother; (6) son or daughter of a brother or sister; (7) brother or sister of a father or mother; (8) son or daughter-in-law, father or mother-in-law, brother or sister-in-law; (9) spouses of the individuals listed in (1)–(8) or the spouse of the beneficiary; and (10) any first cousin.
I remember hearing that the tax-free status of 529 plans would be ending soon. Is that true?
Contributions made to 529 plans will continue to grow federal income tax-deferred. Distributions for higher education expenses will be federal income tax-free and, in some cases, state income tax-free.